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Evaluating Your Business's Legal Structure

FastTrac, Kauffman Foundation

One of the many roles you will have to play in your business is that of security guard. You have to make sure that the company remains safe—nothing enters that could harm your business and nothing leaves that could reduce its value. The more you can use legal protections to safeguard your business, the easier this task becomes.

There are many ways to protect the business, its assets, and employees—one critical way is to conduct business within the most appropriate legal framework. The legal framework you use to support your business can affect your tax payments, legal liability, and potential for future investment.

As an entrepreneur, you must make decisions and take legal actions to structure your business. Otherwise, the law will make those decisions for you, and that can be detrimental. Even if you’ve never officially selected a legal form for your business, you are operating within the parameters of a legal form. States typically hold undeclared businesses to be sole proprietorships or partnerships, leaving you personally responsible for debts and injuries.

Instead of ignoring this issue, take the time to select an appropriate legal structure after consulting an attorney and accountant. If you are in business, you’re currently operating under one of the following legal structures:

  • Sole proprietorship
  • Partnership
  • Corporation
  • S corporation
  • Limited liability company (LLC)
  • Nonprofit corporation

The important question now is whether your legal form is appropriate for your business and its plan for growth. The factors that affect this important decision are listed below. Read these carefully and then complete My Business’s Legal Form to see if you should talk with a lawyer and accountant about changing your current legal structure

Factors Affecting the Choice of Legal Structure

While you should consider many factors in choosing the legal structure of your business, not all factors will apply to every business. Several key issues, however, will apply to most:

Control – Who is the decision maker? The decision maker will control management, determine who receives profits, decide whether to get loans or solicit investors, and be solely responsible for the company’s financial losses.

Taxes – Tax liability is a major concern for business owners. The amount of taxes paid yearly can make or break a business.

Liability –Some legal structures do not protect personal assets from business debts. If you do not want to personally pay the debts of your business, consider a legal structure that will protect your personal assets.

Transferability of ownership – Depending upon the legal structure, one person’s ownership in a business may be transferred to another owner in whole or in part simply by the exchange of a piece of paper.

Longevity of the business – Not all business forms are perpetual. Some forms of business cease when the entrepreneur exits the business.

Raising capital – Simple entities such as sole proprietorships and general partnerships are restricted in their ability to raise capital.

Most often, entrepreneurs are concerned with all of these important issues. The key is to identify the legal structure that best meets your needs and the needs of your business as it grows. This tough decision should not be made without adequate counsel from an attorney, an accountant, and other advisers.

In an ideal world, you would select a legal form of business understanding every legal and tax implication. The reality is that you must rely on the advice of your attorneys and accountants to make this decision. Attorneys and accountants can anticipate many situations based on their experience and on the information you provide. Still, the legal structure of the business is your decision to make and live with. Use My Business’s Legal Form to check that the structure you operate under best covers the factors you are concerned about from the list above and best aligns with your business’s strategy and goals.

The legal form of your business can’t be an afterthought. Your profits, your peace of mind, and even your business may depend upon using the right structure. Schedule appointments with your lawyer and accountant now to review your company’s legal form.

© 2006 Ewing Marion Kauffman Foundation. All rights reserved.

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